It will be a crucial decision for the Federal Reserve this week as traders consider the prospect of a third straight rate cut. Consumer Confidence, Advance GDP and Non-farm Payrolls means that it is a jam packed week for the calendar. With Brexit uncertainty and the looming prospect of a UK general election also to impact, we are looking at a busy week for major markets and consider the outlook for forex, equities and commodities.
At what stage do insurance cuts turn into an all out easing cycle? When the FOMC first cut the Fed Funds rates in July the move was described by Fed chair Powell “to provide insurance against ongoing risks”. However, this “insurance” cut was again reiterated in Powell’s press conference as the Fed cut by another 25 basis points cut in September. If these cuts are really an insurance move then the Fed will be done. However, a third cut in a row can hardly be argued to be insurance, but instead as part of what would be an ongoing easing cycle. The US economy is slowing. Not as much significantly as the case in other major economies such as Germany and the UK, however, it has undoubtedly lost traction. There are signs that the manufacturing contraction is beginning to impact into the vital consumer sector. 70% of the US economy is household consumption, so with retail sales falling for the fist time since February, in addition to sliding trends forming on confidence indicators, Consumer Confidence and Michigan Sentiment. So although last month’s Fed dots were very mixed, and there were two hawkish dissenters, Powell has a tricky decision to make this week. Fed funds futures are pricing in over 90% probability of a rate cut, so it would come with considerable surprise if the Fed sat on its hands. However, three cuts in three meetings moves more from “insurance” to full blown easing cycle. The dollar has already lost its outperformance recently. Signs of hope in the trade dispute is dollar negative, but also the Fed’s easing has hit it. This could be a new trend setting in.